SEC looks to economists for legal cover

April 16, 2012|Sarah N. Lynch | Reuters

(Jonathan Ernst Reuters, REUTERS)

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is taking extra steps to bulletproof its rulemaking, after U.S. appeals court judges, Republican lawmakers and government watchdogs have criticized how the agency measures the economic impact of its rules.

The SEC has internally circulated a memo guiding staff to rely more heavily on agency economists and to provide stronger economic justifications as they craft rules, according to a copy of the March 16 memo reviewed by Reuters.

SEC Chairman Mary Schapiro is scheduled to appear on Tuesday before a U.S. House Oversight subcommittee for a hearing titled "The SEC's Aversion to Cost-Benefit Analysis."

Questioning the quality of the SEC's economic analysis has been a choice weapon for industry groups and Republicans seeking to challenge or slow agency rules.

In the first successful challenge to a rule linked to the 2010 Dodd-Frank financial oversight law, a federal appeals court last July struck down the SEC's "proxy access" rule that would have made it easier for shareholders to nominate directors to corporate boards.

The SEC's memo calls for integrating the agency's economists into the rulewriting process from beginning to end, clearly spelling out a rule's costs and benefits to the fullest extent possible, and requiring economists to sign off before any final rules are adopted.

The memo says that the SEC may in some instances go above and beyond its legal requirements for justifying the need for a rule mandated by Congress by citing other compelling evidence.

"Economists should be involved at the earliest stages of the rulemaking process... and throughout the course of writing proposed and final rules," the memo says. "Economists should be fully integrated members of the rulewriting team."

The SEC's effort to stave off legal challenges and Republican criticism comes as the agency is writing more than 100 rules required by Dodd-Frank.

Jim Overdahl, a former SEC chief economist who is now a vice president at NERA Economic Consulting, said the March 16 memo shows the SEC is starting to treat rulemaking much more like a legal proceeding.

He added that cost-benefit analysis is important because it holds the agency accountable for the rules it writes.

"You want commissioners when they make decisions to make fully informed decisions about the economic effects of the rules that they are proposing," Overdahl said.

"You don't want the economic analysis to minimize the costs, or be written like a press release to help a rule. It should be something that fully articulates the trade-offs, the costs, the benefits."

SLOWED RULEMAKING

Since the SEC's proxy access rule was overturned, the pace of Dodd-Frank rulemaking at the agency has slowed considerably. So far this year, the SEC has not adopted any substantive Dodd-Frank rules.

It has delayed, for instance, finalizing one controversial rule known as "conflict minerals" which will force companies to disclose if their products contain certain minerals from the Democratic Republic of the Congo.

That rule has been a target of the U.S. Chamber of Commerce and others who charge the proposal lacked an adequate analysis and grossly underestimated the costs.

On another controversial rule that will define which companies will face heightened regulations as swap dealers, the SEC recently went out of its way to publicize and seek comments on the economic data that it is using to help write the final rule.

In addition, the SEC's two Republican commissioners have both questioned whether regulators should scrap the current Volcker rule proposal, which limits proprietary trading by banks, due to concerns its market costs may outweigh its benefits.

Tom Quaadman, a vice president at the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said he thinks the SEC's March 16 memo seems like a good "step in the right direction."

But it falls short of doing everything the Chamber wants, such as requiring the SEC to revisit rules two years later to make sure they are having the right impact.

"The reason why Congress and society has decided that cost-benefit analysis is important is because you want to make sure the agencies can put the bad people away, but allow the law-abiding actors to go about their business in an economical way," said Quaadman.